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The Addison-Wesley Series in Economics, ii
Copyright, iv
Preface, xx
1. Introduction, 1
What Is International Economics About?, 3
The Gains from Trade, 4
The Pattern of Trade, 5
How Much Trade?, 5
Balance of Payments, 6
Exchange Rate Determination, 6
International Policy Coordination, 7
The International Capital Market, 7
International Economics: Trade and Money, 8
Part 1. International Trade Theory, 11
2. World Trade: An Overview, 12
Who Trades with Whom?, 13
Size Matters: The Gravity Model, 13
The Logic of the Gravity Model, 15
Using the Gravity Model: Looking for Anomalies, 16
Impediments to Trade: Distance, Barriers, and Borders, 17
The Changing Pattern of World Trade, 19
Has the World Gotten Smaller?, 19
What Do We Trade?, 20
Service Outsourcing, 23
Do Old Rules Still Apply?, 23
Summary, 24
3. Labor Productivity and Comparative Advantage: The Ricardian Model, 27
The Concept of Comparative Advantage, 28
A One-Factor Economy, 29
Production Possibilities, 30
Relative Prices and Supply, 31
Trade in a One-Factor World, 31
Determining the Relative Price After Trade, 32
Box: Comparative Advantage in Practice: The Case of Babe Ruth, 35
The Gains from Trade, 36
A Numerical Example, 37
Relative Wages, 38
Box: The Losses from Nontrade, 39
Misconceptions About Comparative Advantage, 40
Productivity and Competitiveness, 40
The Pauper Labor Argument, 41
Exploitation, 41
Box: Do Wages Reflect Productivity?, 42
Comparative Advantage with Many Goods, 42
Setting Up the Model, 42
Relative Wages and Specialization, 44
Determining the Relative Wage in the Multigood Model, 45
Adding Transport Costs and Nontraded Goods, 47
Empirical Evidence on the Ricardian Model, 48
Summary, 51
4. Resources, Comparative Advantage, and Income Distribution, 54
A Model of a Two-Factor Economy, 55
Prices and Production, 55
Choosing the Mix of Inputs, 57
Factor Prices and Goods Prices, 58
Resources and Output, 61
Effects of International Trade Between Two-Factor Economies, 64
Relative Prices and the Pattern of Trade, 65
Trade and the Distribution of Income, 68
Factor-Price Equalization, 68
Trade and Income Distribution in the Short Run, 70
Case Study: North-South Trade and Income Inequality, 70
The Political Economy of Trade: A Preliminary View, 72
The Gains from Trade, Revisited, 72
Optimal Trade Policy, 73
Income Distribution and Trade Politics, 74
Empirical Evidence on the Heckscher-Ohlin Model, 75
Testing the Heckscher-Ohlin Model, 75
Box: Income Distribution and the Beginnings of Trade Theory, 76
Implications of the Tests, 81
Summary, 81
Appendix: Factor Prices, Goods Prices, and Input Choices, 85
Choice of Technique, 85
Goods Prices and Factor Prices, 86
5. The Standard Trade Model, 88
A Standard Model of a Trading Economy, 89
Production Possibilities and Relative Supply, 89
Relative Prices and Demand, 90
The Welfare Effect of Changes in the Terms of Trade, 93
Determining Relative Prices, 93
Economic Growth: A Shift of the RS Curve, 94
Growth and the Production Possibility Frontier, 94
Relative Supply and the Terms of Trade, 95
International Effects of Growth, 96
Case Study: Has the Growth of Newly Industrializing Countries Hurt Advanced Nations?, 97
International Transfers of Income: Shifting the RD Curve, 99
The Transfer Problem, 99
Effects of a Transfer on the Terms of Trade, 100
Presumptions About the Terms of Trade Effects of Transfers, 101
Case Study: The Transfer Problem and the Asian Crisis, 102
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD, 103
Relative Demand and Supply Effects of a Tariff, 103
Effects of an Export Subsidy, 104
Implications of Terms of Trade Effects: Who Gains and Who Loses?, 105
Summary, 107
Appendix: Representing International Equilibrium with Offer Curves, 111
Deriving a Country’s Offer Curve, 111
International Equilibrium, 113
6. Economies of Scale, Imperfect Competition, and International Trade, 114
Economies of Scale and International Trade: An Overview, 115
Economies of Scale and Market Structure, 116
The Theory of Imperfect Competition, 117
Monopoly: A Brief Review, 118
Monopolistic Competition, 120
Limitations of the Monopolistic Competition Model, 124
Monopolistic Competition and Trade, 125
The Effects of Increased Market Size, 125
Gains from an Integrated Market: A Numerical Example, 127
Economies of Scale and Comparative Advantage, 129
The Significance of Intraindustry Trade, 132
Why Intraindustry Trade Matters, 133
Case Study: Intraindustry Trade in Action: The North American Auto Pact of 1964, 134
Dumping, 135
The Economics of Dumping, 135
Case Study: Antidumping as Protectionism, 138
Reciprocal Dumping, 139
The Theory of External Economies, 140
Specialized Suppliers, 140
Labor Market Pooling, 141
Knowledge Spillovers, 142
External Economies and Increasing Returns, 142
External Economies and International Trade, 143
External Economies and the Pattern of Trade, 143
Trade and Welfare with External Economies, 144
Dynamic Increasing Returns, 145
Interregional Trade and Economic Geography, 146
Box: Tinseltown Economics, 147
Summary, 149
Appendix: Determining Marginal Revenue, 152
7. International Factor Movements, 153
International Labor Mobility, 154
A One-Good Model Without Factor Mobility, 154
International Labor Movement, 156
Extending the Analysis, 157
Case Study: Wage Convergence in the Age of Mass Migration, 158
Case Study: Immigration and the U.S. Economy, 159
International Borrowing and Lending, 160
Intertemporal Production Possibilities and Trade, 161
The Real Interest Rate, 162
Intertemporal Comparative Advantage, 162
Direct Foreign Investment and Multinational Firms, 163
Box: Does Capital Movement to Developing Countries Hurt Workers in High-Wage Countries?, 164
The Theory of Multinational Enterprise, 164
Multinational Firms in Practice, 166
Case Study: Foreign Direct Investment in the United States, 167
Box: Taken for a Ride, 169
Summary, 170
Appendix 1: Finding Total Output from the Marginal Product Curve, 174
Appendix 2: More on Intertemporal Trade, 176
Part 2. International Trade Policy, 181
8. The Instruments of Trade Policy, 182
Basic Tariff Analysis, 182
Supply, Demand, and Trade in a Single Industry, 183
Effects of a Tariff, 185
Measuring the Amount of Protection, 187
Costs and Benefits of a Tariff, 188
Consumer and Producer Surplus, 188
Measuring the Costs and Benefits, 190
Other Instruments of Trade Policy, 192
Export Subsidies: Theory, 192
Case Study: Europe’s Common Agricultural Policy, 193
Import Quotas: Theory, 195
Case Study: An Import Quota in Practice: U.S. Sugar, 195
Voluntary Export Restraints, 197
Case Study: A Voluntary Export Restraint in Practice: Japanese Autos, 197
Local Content Requirements, 198
Box: American Buses, Made in Hungary, 199
Other Trade Policy Instruments, 199
The Effects of Trade Policy: A Summary, 200
Summary, 200
Appendix 1: Tariff Analysis in General Equilibrium, 204
A Tariff in a Small Country, 204
A Tariff in a Large Country, 206
Appendix 2: Tariffs and Import Quotas in the Presence of Monopoly, 208
The Model with Free Trade, 208
The Model with a Tariff, 209
The Model with an Import Quota, 210
Comparing a Tariff and a Quota, 210
9. The Political Economy of Trade Policy, 212
The Case for Free Trade, 213
Free Trade and Efficiency, 213
Additional Gains from Free Trade, 214
Rent-Seeking, 215
Political Argument for Free Trade, 215
Case Study: The Gains from 1992, 216
National Welfare Arguments Against Free Trade, 217
The Terms of Trade Argument for a Tariff, 218
The Domestic Market Failure Argument Against Free Trade, 219
How Convincing Is the Market Failure Argument?, 220
Income Distribution and Trade Policy, 222
Electoral Competition, 222
Box: Politicians for Sale: Evidence from the 1990s, 224
Collective Action, 224
Modeling the Political Process, 225
Who Gets Protected?, 226
International Negotiations and Trade Policy, 227
The Advantages of Negotiation, 228
International Trade Agreements: A Brief History, 230
The Uruguay Round, 231
Trade Liberalization, 232
From the GATT to the WTO, 233
Box: Settling a Dispute—and Creating One, 234
Benefits and Costs, 235
Case Study: Testing the WTO’s Mettle, 236
The Doha Disappointment, 236
Box: Do Agricultural Subsidies Hurt the Third World?, 238
Preferential Trading Agreements, 239
Box: Free Trade Area versus Customs Union, 240
Box: Do Trade Preferences Have Appeal?, 241
Case Study: Trade Diversion in South America, 242
Summary, 243
Appendix: Proving That the Optimum Tariff Is Positive, 247
Demand and Supply, 247
The Tariff and Prices, 247
The Tariff and Domestic Welfare, 248
10. Trade Policy in Developing Countries, 250
Import-Substituting Industrialization, 251
The Infant Industry Argument, 252
Promoting Manufacturing Through Protection, 253
Case Study: Mexico Abandons Import-Substituting Industrialization, 255
Results of Favoring Manufacturing: Problems of Import-Substituting Industrialization, 256
Trade Liberalization Since 1985, 257
Export-Oriented Industrialization: The East Asian Miracle, 259
The Facts of Asian Growth, 259
Trade Policy in the HPAEs, 260
Box: India’s Boom, 261
Industrial Policy in the HPAEs, 262
Other Factors in Growth, 262
Summary, 263
11. Controversies in Trade Policy, 266
Sophisticated Arguments for Activist Trade Policy, 267
Technology and Externalities, 267
Imperfect Competition and Strategic Trade Policy, 268
Case Study: When the Chips Were Up, 272
Globalization and Low-Wage Labor, 273
The Anti-Globalization Movement, 274
Trade and Wages Revisited, 274
Labor Standards and Trade Negotiations, 276
Environmental and Cultural Issues, 277
The WTO and National Independence, 278
Case Study: Bare Feet, Hot Metal, and Globalization, 279
Globalization and the Environment, 280
Globalization, Growth, and Pollution, 280
The Problem of “Pollution Havens”, 282
Environmental Issues and Trade Negotiations, 283
Summary, 284
Part 3. Exchange Rates and Open-Economy Macroeconomics, 287
12. National Income Accounting and the Balance of Payments, 288
The National Income Accounts, 290
National Product and National Income, 291
Capital Depreciation and International Transfers, 292
Gross Domestic Product, 292
National Income Accounting for an Open Economy, 293
Consumption, 293
Investment, 293
Government Purchases, 294
The National Income Identity for an Open Economy, 294
An Imaginary Open Economy, 295
The Current Account and Foreign Indebtedness, 295
Saving and the Current Account, 297
Private and Government Saving, 298
Case Study: Government Deficit Reduction May Not Increase the Current Account Surplus, 299
The Balance of Payments Accounts, 301
Examples of Paired Transactions, 302
The Fundamental Balance of Payments Identity, 304
The Current Account, Once Again, 304
The Capital Account, 306
The Financial Account, 306
The Statistical Discrepancy, 307
Official Reserve Transactions, 307
Case Study: The Assets and Liabilities of the World’s Biggest Debtor, 309
Summary, 312
13. Exchange Rates and the Foreign Exchange Market: An Asset Approach, 317
Exchange Rates and International Transactions, 318
Domestic and Foreign Prices, 318
Exchange Rates and Relative Prices, 320
The Foreign Exchange Market, 321
The Actors, 321
Box: A Tale of Two Dollars, 322
Characteristics of the Market, 324
Spot Rates and Forward Rates, 325
Foreign Exchange Swaps, 326
Futures and Options, 327
The Demand for Foreign Currency Assets, 327
Assets and Asset Returns, 327
Box: Nondeliverable Forward Exchange Trading in Asia, 328
Risk and Liquidity, 330
Interest Rates, 331
Exchange Rates and Asset Returns, 332
A Simple Rule, 333
Return, Risk, and Liquidity in the Foreign Exchange Market, 335
Equilibrium in the Foreign Exchange Market, 336
Interest Parity: The Basic Equilibrium Condition, 336
How Changes in the Current Exchange Rate Affect Expected Returns, 337
The Equilibrium Exchange Rate, 338
Interest Rates, Expectations, and Equilibrium, 341
The Effect of Changing Interest Rates on the Current Exchange Rate, 341
The Effect of Changing Expectations on the Current Exchange Rate, 342
Summary, 343
Appendix: Forward Exchange Rates and Covered Interest Parity, 348
14. Money, Interest Rates, and Exchange Rates, 351
Money Defined: A Brief Review, 352
Money as a Medium of Exchange, 352
Money as a Unit of Account, 352
Money as a Store of Value, 353
What Is Money?, 353
How the Money Supply Is Determined, 353
The Demand for Money by Individuals, 354
Expected Return, 354
Risk, 355
Liquidity, 355
Aggregate Money Demand, 355
The Equilibrium Interest Rate: The Interaction of Money Supply and Demand, 357
Equilibrium in the Money Market, 357
Interest Rates and the Money Supply, 359
Output and the Interest Rate, 359
The Money Supply and the Exchange Rate in the Short Run, 360
Linking Money, the Interest Rate, and the Exchange Rate, 361
U.S. Money Supply and the Dollar/Euro Exchange Rate, 362
Europe’s Money Supply and the Dollar/Euro Exchange Rate, 363
Money, the Price Level, and the Exchange Rate in the Long Run, 366
Money and Money Prices, 366
The Long-Run Effects of Money Supply Changes, 366
Empirical Evidence on Money Supplies and Price Levels, 367
Money and the Exchange Rate in the Long Run, 369
Inflation and Exchange Rate Dynamics, 369
Short-Run Price Rigidity versus Long-Run Price Flexibility, 369
Box: Money Supply Growth and Hyperinflation in Bolivia, 371
Permanent Money Supply Changes and the Exchange Rate, 372
Exchange Rate Overshooting, 375
Case Study: Can Higher Inflation Lead to Currency Appreciation? The Implications of Inflation Targeting, 375
Summary, 378
15. Price Levels and the Exchange Rate in the Long Run, 382
The Law of One Price, 383
Purchasing Power Parity, 384
The Relationship Between PPP and the Law of One Price, 385
Absolute PPP and Relative PPP, 385
A Long-Run Exchange Rate Model Based on PPP, 386
The Fundamental Equation of the Monetary Approach, 386
Ongoing Inflation, Interest Parity, and PPP, 388
The Fisher Effect, 389
Empirical Evidence on PPP and the Law of One Price, 392
Explaining the Problems with PPP, 394
Trade Barriers and Nontradables, 394
Departures from Free Competition, 395
Box: Some Meaty Evidence on the Law of One Price, 396
Differences in Consumption Patterns and Price Level Measurement, 398
PPP in the Short Run and in the Long Run, 398
Case Study: Why Price Levels Are Lower in Poorer Countries, 399
Beyond Purchasing Power Parity: A General Model of Long-Run Exchange Rates, 401
The Real Exchange Rate, 401
Demand, Supply, and the Long-Run Real Exchange Rate, 403
Box: Sticky Prices and the Law of One Price: Evidence from Scandinavian Duty-Free Shops, 404
Nominal and Real Exchange Rates in Long-Run Equilibrium, 407
International Interest Rate Differences and the Real Exchange Rate, 409
Real Interest Parity, 410
Summary, 412
Appendix: The Fisher Effect, the Interest Rate, and the Exchange Rate under the Flexible-Price Monetary Approach, 417
16. Output and the Exchange Rate in the Short Run, 420
Determinants of Aggregate Demand in an Open Economy, 421
Determinants of Consumption Demand, 421
Determinants of the Current Account, 422
How Real Exchange Rate Changes Affect the Current Account, 423
How Disposable Income Changes Affect the Current Account, 424
The Equation of Aggregate Demand, 424
The Real Exchange Rate and Aggregate Demand, 424
Real Income and Aggregate Demand, 425
How Output Is Determined in the Short Run, 425
Output Market Equilibrium in the Short Run: The DD Schedule, 427
Output, the Exchange Rate, and Output Market Equilibrium, 427
Deriving the DD Schedule, 428
Factors That Shift the DD Schedule, 428
Asset Market Equilibrium in the Short Run: The AA Schedule, 431
Output, the Exchange Rate, and Asset Market Equilibrium, 432
Deriving the AA Schedule, 433
Factors That Shift the AA Schedule, 434
Short-Run Equilibrium for an Open Economy: Putting the DD and AA Schedules Together, 435
Temporary Changes in Monetary and Fiscal Policy, 437
Monetary Policy, 437
Fiscal Policy, 438
Policies to Maintain Full Employment, 439
Inflation Bias and Other Problems of Policy Formulation, 440
Permanent Shifts in Monetary and Fiscal Policy, 441
A Permanent Increase in the Money Supply, 442
Adjustment to a Permanent Increase in the Money Supply, 443
A Permanent Fiscal Expansion, 444
Macroeconomic Policies and the Current Account, 446
Gradual Trade Flow Adjustment and Current Account Dynamics, 447
The J-Curve, 447
Exchange Rate Pass-Through and Inflation, 449
Box: Exchange Rates and the Current Account, 450
Summary, 451
Appendix 1: Intertemporal Trade and Consumption Demand, 455
Appendix 2: The Marshall-Lerner Condition and Empirical Estimates of Trade Elasticities, 457
17. Fixed Exchange Rates and Foreign Exchange Intervention, 460
Why Study Fixed Exchange Rates?, 461
Central Bank Intervention and the Money Supply, 462
The Central Bank Balance Sheet and the Money Supply, 462
Foreign Exchange Intervention and the Money Supply, 464
Sterilization, 465
The Balance of Payments and the Money Supply, 466
How the Central Bank Fixes the Exchange Rate, 466
Foreign Exchange Market Equilibrium Under a Fixed Exchange Rate, 467
Money Market Equilibrium Under a Fixed Exchange Rate, 467
A Diagrammatic Analysis, 468
Stabilization Policies with a Fixed Exchange Rate, 469
Monetary Policy, 470
Fiscal Policy, 471
Changes in the Exchange Rate, 472
Adjustment to Fiscal Policy and Exchange Rate Changes, 473
Balance of Payments Crises and Capital Flight, 474
Managed Floating and Sterilized Intervention, 476
Box: Brazil’s 1998–1999 Balance of Payments Crisis, 477
Perfect Asset Substitutability and the Ineffectiveness of Sterilized Intervention, 477
Foreign Exchange Market Equilibrium Under Imperfect Asset Substitutability, 479
The Effects of Sterilized Intervention with Imperfect Asset Substitutability, 479
Evidence on the Effects of Sterilized Intervention, 481
Reserve Currencies in the World Monetary System, 482
The Mechanics of a Reserve Currency Standard, 482
The Asymmetric Position of the Reserve Center, 483
The Gold Standard, 483
The Mechanics of a Gold Standard, 484
Symmetric Monetary Adjustment Under a Gold Standard, 484
Benefits and Drawbacks of the Gold Standard, 485
The Bimetallic Standard, 486
The Gold Exchange Standard, 486
Case Study: The Demand for International Reserves, 487
Summary, 490
Appendix 1: Equilibrium in the Foreign Exchange Market with Imperfect Asset Substitutability, 495
Demand, 495
Supply, 496
Equilibrium, 496
Appendix 2: The Timing of Balance of Payments Crises, 498
Part 4. International Macroeconomic Policy, 501
18. The International Monetary System, 1870–1973, 502
Macroeconomic Policy Goals in an Open Economy, 503
Internal Balance: Full Employment and Price Level Stability, 503
External Balance: The Optimal Level of the Current Account, 504
International Macroeconomic Policy Under the Gold Standard, 1870–1914, 507
Origins of the Gold Standard, 507
External Balance Under the Gold Standard, 507
The Price-Specie-Flow Mechanism, 508
The Gold Standard “Rules of the Game”: Myth and Reality, 509
Internal Balance Under the Gold Standard, 509
Box: Hume versus the Mercantilists, 510
Case Study: The Political Economy of Exchange Rate Regimes: Conflict Over America’s Monetary Standard During the 1890s, 511
The Interwar Years, 1918–1939, 512
The Fleeting Return to Gold, 512
International Economic Disintegration, 513
Case Study: The International Gold Standard and the Great Depression, 514
The Bretton Woods System and the International Monetary Fund, 515
Goals and Structure of the IMF, 515
Convertibility and the Expansion of Private Financial Flows, 516
Speculative Financial Flows and Crises, 517
Analyzing Policy Options Under the Bretton Woods System, 518
Maintaining Internal Balance, 518
Maintaining External Balance, 519
Expenditure-Changing and Expenditure-Switching Policies, 520
The External Balance Problem of the United States, 522
Case Study: The Decline and Fall of the Bretton Woods System, 523
Worldwide Inflation and the Transition to Floating Rates, 525
Summary, 528
19. Macroeconomic Policy and Coordination Under Floating Exchange Rates, 532
The Case for Floating Exchange Rates, 533
Monetary Policy Autonomy, 533
Symmetry, 534
Exchange Rates as Automatic Stabilizers, 535
The Case Against Floating Exchange Rates, 537
Discipline, 537
Destabilizing Speculation and Money Market Disturbances, 538
Injury to International Trade and Investment, 539
Uncoordinated Economic Policies, 539
The Illusion of Greater Autonomy, 539
Case Study: Exchange Rate Experience Between the Oil Shocks, 1973–1980, 540
Macroeconomic Interdependence Under a Floating Rate, 544
Case Study: Disinflation, Crisis, and Global Imbalances, 1980–2008, 545
What Has Been Learned Since 1973?, 551
Monetary Policy Autonomy, 551
Symmetry, 553
The Exchange Rate as an Automatic Stabilizer, 553
Discipline, 554
Destabilizing Speculation, 555
International Trade and Investment, 555
Policy Coordination, 556
Are Fixed Exchange Rates Even an Option for Most Countries?, 556
Directions for Reform, 557
Summary, 558
Appendix: International Policy Coordination Failures, 562
20. Optimum Currency Areas and the European Experience, 565
How the European Single Currency Evolved, 567
What Has Driven European Monetary Cooperation?, 567
The European Monetary System, 1979–1998, 568
German Monetary Dominance and the Credibility Theory of the EMS, 569
The EU “1992” Initiative, 570
European Economic and Monetary Union, 571
The Euro and Economic Policy in the Euro Zone, 572
The Maastricht Convergence Criteria and the Stability and Growth Pact, 572
The European System of Central Banks, 573
The Revised Exchange Rate Mechanism, 574
The Theory of Optimum Currency Areas, 574
Economic Integration and the Benefits of a Fixed Exchange Rate Area: The GG Schedule, 575
Economic Integration and the Costs of a Fixed Exchange Rate Area: The LL Schedule, 577
The Decision to Join a Currency Area: Putting the GG and LL Schedules Together, 579
Box: Gordon Brown and the Five Economic Tests, 580
What Is an Optimum Currency Area?, 581
Case Study: Is Europe an Optimum Currency Area?, 582
The Future of EMU, 587
Box: Adjusting to Asymmetric Shocks: Canada in the 2000s, 588
Summary, 590
21. The Global Capital Market: Performance and Policy Problems, 594
The International Capital Market and the Gains from Trade, 595
Three Types of Gain from Trade, 595
Risk Aversion, 596
Portfolio Diversification as a Motive for International Asset Trade, 597
The Menu of International Assets: Debt versus Equity, 598
International Banking and the International Capital Market, 598
The Structure of the International Capital Market, 599
Growth of the International Capital Market, 599
Offshore Banking and Offshore Currency Trading, 600
The Growth of Eurocurrency Trading, 601
The Importance of Regulatory Asymmetries, 602
Regulating International Banking, 603
The Problem of Bank Failure, 603
Difficulties in Regulating International Banking, 605
International Regulatory Cooperation, 606
Case Study: When the World Almost Ended: Two Episodes of Market Turmoil, 607
How Well Has the International Capital Market Performed?, 610
The Extent of International Portfolio Diversification, 610
The Extent of Intertemporal Trade, 611
Onshore-Offshore Interest Differentials, 613
The Efficiency of the Foreign Exchange Market, 614
Summary, 617
22. Developing Countries: Growth, Crisis, and Reform, 621
Income, Wealth, and Growth in the World Economy, 622
The Gap Between Rich and Poor, 622
Has the World Income Gap Narrowed Over Time?, 623
Structural Features of Developing Countries, 625
Developing-Country Borrowing and Debt, 628
The Economics of Financial Inflows to Developing Countries, 628
The Problem of Default, 630
Alternative Forms of Financial Inflow, 632
The Problem of “Original Sin”, 633
The Debt Crisis of the 1980s, 634
Reforms, Capital Inflows, and the Return of Crisis, 634
East Asia: Success and Crisis, 637
Box: Why Have Developing Countries Accumulated Such High Levels of International Reserves?, 638
The East Asian Economic Miracle, 640
Box: What Did East Asia Do Right?, 641
Asian Weaknesses, 641
Box: The Simple Algebra of Moral Hazard, 642
The Asian Financial Crisis, 643
Spillover to Russia, 644
Case Study: Can Currency Boards Make Fixed Exchange Rates Credible?, 646
Lessons of Developing-Country Crises, 648
Reforming the World’s Financial “Architecture”, 649
Capital Mobility and the Trilemma of the Exchange Rate Regime, 650
“Prophylactic” Measures, 652
Coping with Crisis, 652
A Confused Future, 653
Case Study: China’s Undervalued Currency, 653
Understanding Global Capital Flows and the Global Distribution of Income: Is Geography Destiny?, 656
Summary, 659
Mathematical Postscripts, 665
Postscript to Chapter 4: The Factor Proportions Model, 666
Factor Prices and Costs, 666
Goods Prices and Factor Prices, 668
Factor Supplies and Outputs, 669
Postscript to Chapter 5: The Trading World Economy, 670
Supply, Demand, and Equilibrium, 670
Supply, Demand, and the Stability of Equilibrium, 672
Effects of Changes in Supply and Demand, 674
Economic Growth, 674
The Transfer Problem, 675
A Tariff, 676
Postscript to Chapter 6: The Monopolistic Competition Model, 678
Postscript to Chapter 21: Risk Aversion and International Portfolio Diversification, 680
An Analytical Derivation of the Optimal Portfolio, 680
A Diagrammatic Derivation of the Optimal Portfolio, 681
The Effects of Changing Rates of Return, 684
Credits, 687
Index, 689

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